As commercial software providers are preparing to release the 2017 versions of their tax return software, HMRC have had to concede that the dividend tax allowance of £5,000 (introduced by George Osborne in 2016) has made the personal tax computation too complicated for the HMRC technicians to program the HMRC tax computation accurately.

As a result the software houses have been told by HMRC that their software should not be used to file online if a taxpayer has combinations of particular types of income. Instead a paper return should be submitted and HMRC have said they will extend the normal deadline of 31 October 2017 for paper returns to the online filing deadline of 31 January 2018.

The potential tax overcharge if online filing is used for these so called “Exclusion” cases could be as much as £1,000.

Tim Good and Giles Mooney of Absolute Accounting Software Ltd have been in discussions with HMRC since May last year and the Revenue have incorporated some of the algorithms that Good has developed into their own briefing document for the 2016-17 tax calculation. According to Good the HMRC team responsible for coding the main HMRC self-assessment system were simply unable to complete the task from the Excel algorithms in time for the start of the new tax year.

A simple example is a taxpayer with pension income of £11,000 and interest income of £26,000. The correct amount of tax for 2016-17 is £4,000. But the HMRC system and hence every single approved tax return package will incorrectly calculate the tax as £5,000. If they file online the taxpayer will be overcharged by £1,000!

Commercial software houses have to follow the HMRC specification when coding their software and so if the HMRC system has in-built errors those have to be replicated by the commercial providers – otherwise returns filed using commercial packages will be rejected. This is why HMRC have issued the Exclusions instruction: to get the right tax a paper return should be filed for those taxpayers within the Exclusions.

Absolute have developed a spreadsheet that gets the right answer and have already supplied this to over one thousand accountancy firms. It now seems that all agents are going to need such a tool to determine whether a particular client will be overcharged if they file online.

According to Mooney the taxpayers that could be affected would seem to include first those with total income made up of savings and non-savings income over £32,000 of which the non-savings income is between £11,000 and £16,000 and secondly those with non-dividend income of £27,000 to £32,000 plus dividends which take their total income to over £145,000.

The Absolute spreadsheet is available from £99 + VAT via https://www.absolutetax.co.uk/products/absolute-taxpert-apps